Egypts Islamist
government is making preparations for the countrys first
sovereign sukuk, as foreign-currency reserves and the credit
rating rapidly decline because of continued political turmoil.
On January 16, the cabinet of ministers approved a new draft
sukuk bill after
Shariah scholars rejected a previous version.

Sukuk laws exist in many
other countries, including ones without a Muslim majority, such
as the UK. But in Egypt, the proposed law has been
controversial. Secularist opposition figures say it represents
an encroaching Islamist influence over state institutions
 partly because the Muslim Brotherhood, the party from
which president Mohamed Morsi hails, has stated partly
religious reasons for
promoting sukuk.

Others in Egypt have
raised concerns about the fact that physical assets must
underpin sukuk. A rumour began to circulate that the Suez Canal
or other state assets would be used. Prime minister Hisham
Qandil denied this in January on Facebook.

Technical
objection

Some of the Islamic
scholars objections to the previous bill were more
technical. The first draft enabled the government to lease out
assets for up to 60 years in order to underpin sukuk, although
the Islamic Research Academy, a powerful Shariah body linked to
Egypts Al-Azhar University, voiced concerns that this
would allow authorities to abuse their control of public
assets.

Outside Egypt, even some
respected Shariah scholars reckon Islamic finance might be of
dubious urgency in a country with so much else to deal with
after the 2011 uprising and the toppling of Hosni Mubarak
as president. "I would have thought the first priority is to
feed hungry mouths," says Mohamed Ali Elgari, a Saudi Arabian
Shariah scholar who this month wins Euromoneys award for
outstanding contribution to Islamic finance.

But there is equally a
sense that Egypt needs the legislation to expand its available
avenues for funding. The country has a widening budget deficit,
declining foreign-currency reserves ($15 billion in January
compared with $36 billion before the uprising), a
deteriorating currency, and a credit rating that has fallen
in several stages from a pre-revolution double-B to B minus in
December 2012.

New draft

The government, in any
case, appears determined that the bill should be passed, and
the new drafts approval by the cabinet was clearly a big
moment for the new finance minister, El-Morsi Hegazy.
Hegazys appointment, just 10 days previously, raised
eyebrows among some secularists, as he was until then an
Islamic finance and economics professor.

According to comments
reported by Reuters, Hegazy reckons the law might ultimately
raise an additional $10 billion for the sovereign. But any
sukuk issue is going to be costly to get away. Yields on
Egypts 364-day treasury bills hit 14.4% in
mid-January.

Even wide pricing might
not guarantee the success of a deal. Investors, by and large,
do not yet sound ready to bite. "Its too early for
Egypt," says the Middle East head of an international fund
manager. "Theres probably another revolution to come.
Lets not get stuck in the middle of it."

Bringing to fruition a
planned $4.8 billion IMF loan will be Hegazys next big
challenge. It remains stalled despite the fact that what the
IMF calls a "preliminary, staff-level agreement" was reached on
November 20.

In the meantime the
country has been receiving aid and investment from elsewhere.
Turkey has so far lent $1 billion, the last $500 million of it
in January.
Qatar has put $2.5 billion into Egypts central bank,
part of what the Qatari finance minister has described as a
total $5 billion aid package.

Private
interest

There are early signs of
private-sector interest too.
Qatar National Bank is buying Société
Générales Egyptian operation and Emirates
NDB is buying the Egyptian unit of BNP Paribas. There was also
news last month that Bill Gates would join a group of US
investors putting $1 billion into construction and fertilizer
group OCI. That, though, comes as part of OCIs move from
Cairo to Amsterdam.

"[OCIs move] is
another negative as it will cut trading on the market," says
Angus Blair, president of the Signet Institute, a regional
think-tank. OCI accounts for over 20% of the Egyptian stock
market index.

Last year the government said it intended to boost the
Shariah-compliant share of total banking assets from 5% to 35%
within five years. But these are ambitious plans.

As an Islamic finance market,
Egypt has considerable potential: a population of 80
million, mainly Muslims, of whom only 10% have bank accounts.
International comparisons are apposite. Malaysia is considered
the gold standard for the prudent and successful adoption of a
new Islamic finance industry, yet after a decade of hard work
Islamic finance accounts for just 22% of banking deposits
there.

Further reading on Euromoney

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